COST SHARING

Cost sharing is a process wherein two or more organizations work together
to secure savings in one or more areas of business operations. Such
partnerships may also be pursued to realize other business
advantages—increased marketplace exposure, access to technology,
etc.—but cost savings is usually a central component of these
arrangements. Cost-sharing partnerships can be implemented in any number
of operating areas, from marketing to transportation to research and
development. It is a favorite tool of many small business enterprises that
have limited financial resources.

Relatively few cost-sharing arrangements have been implemented for the
actual manufacture of goods or execution of services. Instead, the
majority of cost-sharing plans are in the area of marketing and
advertising. "Today's direct marketing partnerships achieve
impressive cost-benefit results," stated Myron Gould in
Direct Marketing.
He cited three primary advantages associated with cost-sharing
partnerships in this operational area:

They enable marketers to address the competitive challenges of the
rising cost of direct marketing essentials, such as postage and paper.

They help marketers reduce direct mail expenses because costs are
shared.

Their effectiveness is enhanced by the development of technology tools
and media outlet alternatives.

Gould cited the latter factor as particularly important for businesses
seeking to engage in effective cost-sharing. "Computers have
transformed [the marketing] industry and given birth to partnership
opportunities. Today's computer-driven partnerships empower us to
target qualified recipients and segment lists as never before. Many of our
alternative direct marketing programs have traditionally taken a broadcast
approach—reaching broadly defined segments. Now, partnerships offer
qualified segmentation, targeting narrower, clearly defined lifestyle and
demographic segments. Technical advances in imprinting and inserting also
offer enhanced ability to customize the package and the offer."

FINDING A COST-SHARING PARTNER

"There are no rules, standards, or boundaries that should restrict
your vision when seeking a partner. Rather, shared goals should guide your
'vision quest,' " wrote Gould. "Partnership
can be formed in the profit and nonprofit sectors, in the same or
different
industries, within different divisions of the same company, and in
similar market segments/demographics in non-competitive
industries."

Many small business owners seek out allies for the exclusive purpose of
registering savings in their operating costs. This is a perfectly
legitimate course of action, but entrepreneurs should make certain that
the final agreement is a fair one that explicitly delineates the terms of
the agreement. Indeed, written partnership agreements that define each
partner's spending obligations should be insisted on. In addition
to discussing cost-sharing matters, these documents can also provide
details on agreed-upon procedures and work flow, parameters for
responsibilities, and mechanisms to measure results both during and after
the project. As Gould observed, carefully crafted proposals "will
help you mitigate concerns about loss of control and structuring the
partnership for mutual benefit. When a partnership fulfills the
consumers' needs with a new, exciting, or value-added offer or
program, risks are minimized for all involved."

In addition to ensuring that cost-sharing agreements are sufficiently
documented, small business owners should weigh possible other benefits
associated with partner alternatives when making their decision. Gould
noted, for example, that a larger company might be able to provide a small
business with valuable access to technology and training, while a smaller
business might be blessed with a much-coveted contemporary market image.
Ideally, a small business owner will be able to find a partner who not
only can help him or her secure savings in one or more aspects of business
operations, but also provide additional benefits.

COST-SHARING ARRANGEMENTS AND THE INTERNAL REVENUE SERVICE

The Internal Revenue Service (IRS) maintains certain rules concerning how
cost-sharing agreements within business groups should allocate costs.
According to the IRS, a cost-sharing arrangement is defined as an
agreement under which costs to develop intangibles are shared in
proportion to reasonably anticipated benefits that each entity will reap.
According to
The Tax Advisor's
Adrian J.W. Dicker, such arrangements must include two or more
participants; provide a method to calculate each controlled
participant's share of intangible development costs, based on
factors that can reasonably be expected to reflect each
participant's share of anticipated benefits; provide for
adjustments to the controlled participant's shares of intangible
development costs to account for changes in economic conditions and the
business operations and practices of the participants; and be recorded in
an up-to-date document that provides detailed information on specifics of
the arrangement.

Dicker noted that the IRS also established a "safe harbor"
for actual benefits that diverge from estimates, but only if the
difference is less than 20 percent: "In allocating intangible
development costs under a cost-sharing agreement, it is necessary to
project the participant's share of anticipated benefits. That share
is then compared to the participant's allocated share of the total
costs. If these shares are not equal, the Service has the power to make
adjustments. Benefits would include not only additional income generated
but also costs saved by the use of the intangible. Timing of costs and
benefits can be adjusted using discounting."

Finally, Dicker pointed out that businesses that take part in a
cost-sharing agreement are required to make a buy-in payment if the
partnership calls for any transfer of intangible property. These buy-in
payments can take the form of lump sums, installment payments, or royalty
payments. "Similarly, if a participants' shares change or a
participant withdraws," wrote Dicker, "there are deemed
disposals and acquisitions requiring buy-in or buy-out payments."